Morgan Stanley has revised its prediction regarding the Bank of England (BOE) rate cuts, now anticipating no cuts for the remainder of the year. Previously, Morgan Stanley considered potential cuts in both November and December but adjusted its expectations to assume rate reductions from November 2025, aiming for a terminal rate of 2.75%.
UBS Global Wealth Management and Peel Hunt have similarly adjusted their forecasts, also not expecting any BOE rate cuts this year. In contrast, BNP Paribas has postponed its expectation of a rate cut from November to December.
Repricing the Rate Environment
The outlook for UK interest rates has shifted significantly following the Bank of England’s decision yesterday. We are now seeing major banks pull their calls for rate cuts in November and December. This means the market must re-price for a higher-for-longer rate environment through the end of 2025.
This change in sentiment is supported by the latest data released earlier this week. The August 2025 CPI print came in unexpectedly hot at 3.1%, while wage growth remains stubbornly high at 4.5%. These figures make it very difficult for the Monetary Policy Committee to justify a cut anytime soon.
For us in the derivatives market, this points towards positioning for higher short-term rates. We should consider unwinding any positions that benefit from falling rates, such as receiving fixed on SONIA swaps. The primary trade now involves paying fixed on swaps dated through early 2026 or buying calls on short-term interest rate futures.
We expect this to apply downward pressure on short-dated UK government bonds, pushing yields higher. Shorting two-year Gilt futures could be an effective way to play this repricing in the coming weeks. The yield on the 2-year Gilt has already jumped 15 basis points to 4.25% in the last 24 hours, and we see more room for it to run.
British Pound Outlook
The British Pound should find support from these revised rate expectations. We could see GBP/USD test the 1.30 level as the interest rate differential with the US dollar narrows. A strategy of buying sterling call options offers a defined-risk way to benefit from potential currency appreciation.
This situation feels very similar to what we experienced back in 2023 and 2024, when sticky inflation repeatedly forced the BOE to disappoint markets that were pricing in premature cuts. That period taught us that the final leg of disinflation is often the hardest. The market seems to be re-learning that lesson right now.
